1.A German bank issues a three-month letter of credit on behalf of its customer in Germany, who is planning to import $100 000 worth of goods from Australia. It charges an upfront fee of 100 basis points.

What upfront fee does the bank earn?

If the Australian exporter decides to discount this letter of credit after it has been accepted by the German bank, how much will the exporter receive, assuming that the interest rate currently is 5 per cent and that 90 days remain before maturity? (Hint: To discount a security, use the time value of money formula.)

What risk does the German bank incur by issuing this letter of credit? LO 16.3 , 16.4